Real Money

Coal, Peabody Energy Are Bullish in the Long Term -- Here's Why

Profit from coal is down but not out.

NEW YORK (TheStreet) -- The coal sector has taken a beating. Market Vectors Coal (KOL), the main coal exchange traded fund, and Peabody Energy (BTU), the largest publicly traded coal company, are down nearly 5% and 15% respectively for 2014. That is after a barrage of bearish news, ranging from the "war on coal" waged by the Obama Administration to Stanford University divesting from the industry.

Three recent developments, however, should have investors taking a long-term bullish position on coal securities.

First, coal continues to be a very attractive energy source based on price.

Oil and natural gas have surged in price. United States Oil (USO), the main ETF for oil, is up more than 10% for 2014. United States Natural Gas (UNG), the main ETF for natural gas, has risen around 18% for the same period.

As detailed in a previous article on TheStreet, oil appears to be at a permanently high price due to its new role as a safe-haven asset. The more expensive oil and natural gas are, the more alluring coal is a fuel.

Second, the big money is betting big on a commodities boom. That's bullish for coal.

A recent article in The Wall Street Journal reported that hedge funds and private equity groups are starting to buy up assets in the shipping sector. This is transpiring due to an expectation of more demand for shipping to transport commodities such as copper and coal.

That means one thing: China is buying.

China is the world's largest consumer of coal, by far. Any growth in China that results in more consumption of any industrial commodity is very positive for coal.

Third, there is an optimistic outlook from Wall Street for Caterpillar (CAT) and Joy Global (JOY), two heavy equipment companies with extensive operations in the coal industry. That too is bullish for coal.

Joy Global received a bullish recommendation by RBC Capital Markets on June 6, raising the target price from $62 to $67. The stock has jumped nearly 7% in the last month. Caterpillar is up 5% for the same period. More than 60% of Joy's sales are coal-related. Caterpillar is the largest maker of mining equipment in the world.